Lululemon Q2 FY2026: a $134.5M tariff refund flattered every headline

Lululemon sells technical athletic apparel, footwear and accessories, mostly through its own stores and website. In the second quarter of fiscal 2026 it sold $2,415.6 million of it, down 4% year over year, and its headline numbers looked reassuring: gross margin rose 200 basis points to 60.5%, and diluted earnings per share were $2.92. Read the footnote, though, and the reassurance dissolves. A one-time $134.5 million tariff refund — cash returned to the company after courts questioned certain U.S. tariffs — added 560 basis points to gross margin and $0.86 to EPS. Take it out, and this was a quarter in which the merchandise margin fell, operating margin fell by roughly a third of its historical level, and comparable sales fell 9%. Management then cut the full-year outlook and guided the current quarter to a double-digit revenue decline.

This is still a very profitable company. But the reported margin expansion did not come from the business, and the one-line finding is that the tariff refund did the heavy lifting.

The income statement, with and without the refund

($ thousands)	Q2 FY2026	Q2 FY2025	Change
Net revenue	2,415,631	2,525,219	−4.3%
Cost of goods sold	953,753	1,048,017	−9.0%
Gross profit	1,461,878	1,477,202	−1.0%
Gross margin	60.5%	58.5%	+200 bps
SG&A expenses	1,006,332	951,658	+5.7%
SG&A as % of revenue	41.7%	37.7%	+400 bps
Income from operations	453,653	523,814	−13.4%
Operating margin	18.8%	20.7%	−190 bps
Other income, net	13,698	9,737	+40.7%
Income tax expense	138,128	162,646	(rate 29.6% vs 30.5%)
Net income	329,223	370,905	−11.2%
Diluted EPS	$2.92	$3.10	−5.8%
Diluted weighted-avg. shares	112,919	119,680	−5.6%

Two things in that table only make sense once the refund is stripped out.

The company itself discloses the mechanics: during the quarter it received International Emergency Economic Powers Act (“IEEPA”) tariff refunds of $134.5 million, recognised as a reduction of cost of goods sold, plus $4.1 million of associated interest in other income. Together they increased diluted EPS by $0.86. So:

	Reported	Tariff refund	Underlying
Gross margin	60.5%	+5.6 pts	≈55.0%
Operating margin	18.8%	+5.6 pts	≈13.2%
Diluted EPS	$2.92	+$0.86	$2.06

Against the prior-year comparatives — gross margin 58.5%, operating margin 20.7%, EPS $3.10 — the underlying picture is the reverse of the headline. Underlying gross margin fell about 360 basis points, underlying operating margin fell about 750 basis points, and underlying EPS was down roughly a third. The refund did not merely add a little polish; it flipped the sign on the margin story.

The Associated Press, using Zacks data, put the pre-print consensus at adjusted EPS of $1.79 (12 analysts) and revenue of $2.47 billion (11 analysts). On that basis the quarter was a modest earnings beat on the adjusted $2.06 and a revenue miss at $2.42 billion. Both facts are attributed to that outlet; the company does not publish a “consensus.”

Did Lululemon meet its own guidance in Q2 FY2026?

On revenue, no. Net revenue of $2,415.6 million came in below the bottom of the $2.450–$2.475 billion range lululemon guided to in its June 4, 2026 8-K, which had pointed to a 2% to 3% decline against the 4% actually reported. On earnings, yes: diluted EPS of $2.92 was above the top of the $1.76–$1.81 range, and that guidance did not reflect any IEEPA tariff refunds — so the cleaner comparison is the $2.06 left after removing the $0.86 refund benefit (our arithmetic), which still cleared the range. Year over year, EPS fell from $3.10. The full-year outlook was cut, from $11.000–$11.150 billion of revenue and $10.95–$11.15 of EPS in June to $10.350–$10.500 billion and $9.48–$9.73 now.

Comparable sales are the number that matters, and they fell 9%

Revenue at a retailer blends two very different things: sales from stores open at least a year (comparable, or same-store, sales) and sales from newly opened stores. New stores flatter the top line; comparable sales tell you whether the existing base is healthy. Lululemon’s were not.

Q2 FY2026 vs FY2025	Net revenue change	Comparable sales change
Americas	−8%	−12%
— United States	−8%	—
— Canada	−11% (−9% constant $)	—
International	+4% (+2% constant $)	−3% (−6% constant $)
— China Mainland	+4% (−2% constant $)	−2% (−8% constant $)
— Rest of World	+5% (+6% constant $)	−4% (−3% constant $)
Total	−4% (−5% constant $)	−9% (−10% constant $)

Total comparable sales fell 9% (10% in constant dollars). In the Americas — the largest region — comparable sales fell 12%. That is a deep decline for a brand whose whole premium proposition rests on being wanted rather than discounted.

The more important tell is hidden in the international line. International net revenue grew 4%, and for two years that growth — led by China — has been the bull case. But international comparable sales were negative (−3%, and −6% in constant dollars), and China Mainland comparable sales fell 8% in constant dollars. In other words, the 4% international growth is coming from opening new stores, not from selling more in the ones already open. The engine that was supposed to offset a maturing Americas is now, on a same-store basis, also going backwards.

Store growth is doing the work the comps are not

Company-operated stores	Q1 FY2026	Q2 FY2026
Open at start of quarter	811	816
Opened in quarter	11	11
Closed in quarter	6	2
Open at end of quarter	816	825
Gross square feet (thousands)	3,788	3,880

Lululemon added nine net new stores to end at 825, and square footage grew to 3.88 million. Square footage is up while comparable sales are down — the classic shape of a retailer leaning on unit growth to hold the top line steady as same-store demand softens. It works on revenue for a while; it does not work on the margin the same-store base used to earn.

SG&A is rising into a downturn

The other line moving the wrong way is spending. SG&A rose 5.7% to $1,006.3 million even as revenue fell 4.3%, so it jumped to 41.7% of revenue from 37.7% — 400 basis points of deleverage. Management is explicit that this is deliberate: the interim co-CEO’s statement points to “increasing our marketing investments” to reignite growth. That may be the right call, but the arithmetic is unforgiving in the short run — every dollar of extra marketing on a falling revenue base widens the gap between the headline margin and the underlying one. It is the second reason (after the vanishing refund) that operating margin has further to fall before it stabilises.

The balance sheet is still a fortress, and inventory is clean

Whatever is wrong here, it is not the balance sheet.

($ thousands)	Aug 2, 2026	Feb 1, 2026	Aug 3, 2025
Cash and cash equivalents	1,389,737	1,807,202	1,155,794
Inventories	1,711,450	1,700,753	1,722,570
Total current assets	3,945,587	4,262,701	3,528,728
Total assets	8,484,578	8,456,743	7,523,439
Total current liabilities	1,801,651	1,887,548	1,557,346
Stockholders’ equity	4,791,174	4,961,840	4,387,279

Lululemon carries $1.39 billion of cash, an undrawn revolver with $593.7 million of capacity, and no funded debt. Crucially for a clothing retailer, inventory is disciplined: dollar inventories were roughly flat year over year (−1%, to $1,711.5 million) and units were down 7% — falling faster than the 4% revenue decline. A brand that is losing demand and piling up inventory is heading for markdowns that would gut the margin further; that is not what happened here. The inventory position gives management room to protect price.

Cash equity fell from February because the company is returning capital: it repurchased 2.7 million shares for $330.0 million in the quarter, and financing activities used $712.2 million over the first half. Buybacks are also the reason EPS fell only 5.8% while net income fell 11.2% — a 5.6% smaller share count did half the work of holding the per-share line. First-half operating cash flow was strong at $589.3 million, up from $209.7 million a year ago (the prior year carried a large working-capital drag).

The guidance is the clearest statement in the release

Forward numbers are management’s own view, and here they are candid. For the third quarter, Lululemon guides net revenue to $2.290–2.320 billion, a decline of 10–11%, with diluted EPS of $0.93–0.98. For the full year it “now expects” — its own word is a revised outlook — net revenue of $10.350–10.500 billion, a decline of 5–7%, and diluted EPS of $9.48–9.73 (including the $0.86 of tariff benefit already banked, but no further refunds).

Read those together with the quarter. Q2 revenue fell 4%; Q3 is guided to fall 10–11%. That is not stabilisation — the guide points to the decline accelerating into the back half. The full-year EPS range, meanwhile, leans on a first half that already contains the $0.86 one-off: the guide of $9.48–$9.73 implies a second half of roughly $4.89–$5.14, which clears the reported first half’s $4.59 only because Q4 is the year’s largest quarter — strip the one-off and clean first-half EPS is about $3.73, so the underlying second-half run-rate is not the improvement the headline makes it look.

One piece of context sits behind all of it: leadership is in transition. The quarter was reported by two interim co-CEOs — CFO Meghan Frank and Chief Commercial Officer André Maestrini — and the release notes incoming CEO Heidi O’Neill starts “next week.” A revised-down outlook handed to a new chief executive is a familiar pattern; the strategic reset, if there is one, will show up on later reports, not this one.

The bear case, stated fairly

1. The entire reported margin expansion is a one-time item. Ex the $134.5 million refund, gross margin was about 55% (down ~360 bps YoY) and operating margin about 13% (down ~750 bps). The business got less profitable, not more.
2. Underlying EPS was $2.06 against $3.10 — down about a third. The reported $2.92 owes $0.86 to a refund that will not recur, and the full-year guide banks that same $0.86.
3. Comparable sales fell 9%, and the Americas fell 12%. The core, highest-margin same-store engine is contracting, not just growing slowly.
4. International is now negative on a same-store basis too. Its +4% net revenue is store openings; comparable sales were −3% (−6% constant dollars) and China −8% in constant dollars. The growth region has stopped growing where it counts.
5. Guidance points down, and steeper. Q3 revenue is guided −10% to −11% against Q2’s −4%, and the full-year outlook was revised lower.
6. Costs are rising into the decline. SG&A grew 5.7% on falling revenue, pushing it to 41.7% of sales; the extra marketing has to produce sales before it stops being pure deleverage.

The bull case, equally concrete

Lululemon remains genuinely, substantially profitable — an 18.8% operating margin, $453.7 million of quarterly operating income, and $589 million of first-half operating cash flow are numbers most retailers would envy even after the decline. The balance sheet is pristine: $1.39 billion of cash, no debt, and — the detail that matters most in apparel — inventory units down 7%, which means the softness has not turned into a markdown problem that would compound the margin damage. International revenue still grew 4%, Rest of World was up 5–6% in constant dollars, and the store base expanded to 825, so the physical footprint of future growth is still being laid. The company beat the reduced Street EPS estimate ($2.06 adjusted vs $1.79) and is buying back stock at what it evidently considers value ($330 million in the quarter). And the tariff refund, however one-off, is real cash returned against a real cost pressure — one that, if trade policy eases, becomes a tailwind rather than a windfall. A permanent CEO arriving with a cleared-down outlook has the setup to reset expectations from a floor.

What to check at the Q3 report

• Total and Americas comparable sales, against −9% and −12%. The Q3 revenue guide of −10% to −11% implies these get worse before they get better; whether they do is the whole question.
• International and China comparable sales, against −3% and −8% (constant dollars). Re-stabilising the growth region matters more than any single quarter’s headline.
• Gross margin excluding tariff items, against the ~55% underlying mark. This is the merchandise margin the same-store business actually earns, and the one the refund hid.
• SG&A as a percent of revenue, against 41.7%. Whether the stepped-up marketing produces sales — or just more deleverage.
• Inventory units, against −7%. Continued discipline is what keeps the margin from a markdown spiral.
• EPS against the $0.93–0.98 Q3 guide, and the first strategic signals from incoming CEO Heidi O’Neill.

The read

Lululemon’s headline quarter — 60.5% gross margin, $2.92 EPS, a margin that “expanded” — is a good example of why the footnotes matter. A one-time $134.5 million tariff refund added 560 basis points to margin and $0.86 to EPS; without it, gross margin was about 55%, operating margin about 13%, and EPS $2.06, all down sharply. Underneath, comparable sales fell 9%, the Americas fell 12%, and the international growth story turned negative on a same-store basis. This is still a cash-rich, debt-free, disciplined operator that will remain very profitable even as revenue declines — the balance sheet and clean inventory are the real bull case. But the trajectory the guidance describes is a deepening decline, not a bottom.

For anyone following LULU, the two numbers that matter at the next report are comparable sales — especially in the Americas — and gross margin stripped of the tariff refund. The first tells you whether demand is stabilising; the second tells you what the business earns once the one-off is gone. Revenue and reported EPS told you almost nothing this quarter that those two numbers did not tell you better.

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Sources and method. Company figures — net revenue of $2,415,631 thousand against $2,525,219 thousand (first two quarters $4,887,234 thousand against $4,895,879 thousand); cost of goods sold of $953,753 thousand, gross profit of $1,461,878 thousand at a 60.5% margin against 58.5%, SG&A of $1,006,332 thousand, amortisation of intangibles of $1,893 thousand, income from operations of $453,653 thousand at an 18.8% margin against $523,814 thousand at 20.7%, other income of $13,698 thousand, income before tax of $467,351 thousand, income tax of $138,128 thousand (a 29.6% rate against 30.5%), net income of $329,223 thousand against $370,905 thousand, and basic and diluted EPS of $2.92 against $3.10 on 112,919 thousand diluted weighted-average shares against 119,680 thousand; the disclosure that a $134.5 million IEEPA tariff refund plus $4.1 million of associated interest increased gross margin and operating margin by 560 basis points and diluted EPS by $0.86; the comparable-sales and net-revenue segment changes (Americas net revenue −8% and comparable sales −12%; international net revenue +4% and comparable sales −3%, or +2% and −6% in constant dollars; China Mainland net revenue +4% and comparable sales −2%, or −2% and −8% in constant dollars; total comparable sales −9%, or −10% in constant dollars); the balance-sheet lines (cash and equivalents of $1,389,737 thousand, inventories of $1,711,450 thousand, total assets of $8,484,578 thousand, stockholders’ equity of $4,791,174 thousand, each against the 1 February 2026 and 3 August 2025 comparatives, and the $593.7 million of undrawn revolver capacity); the statement that inventory units fell 7%; the first-half cash-flow lines (operating cash flow of $589,278 thousand against $209,722 thousand, investing outflows of $281,802 thousand, financing outflows of $712,225 thousand); the repurchase of 2.7 million shares for $330.0 million; the store count of 825 (nine net new) and 3,880 thousand gross square feet; the interim co-CEO leadership and the incoming CEO; and all Q3 and full-year fiscal 2026 guidance — are lululemon’s own disclosures in Exhibit 99.1 to the Form 8-K filed 2026-09-03 for the quarter ended 2026-08-02, reported after the close, read directly from the filing on SEC EDGAR and linked above. The executive quotations are from the same document.

Not company figures, and attributed accordingly: the pre-print consensus of adjusted EPS $1.79 (12 analysts) and revenue $2.47 billion (11 analysts), and the characterisation of the quarter as an adjusted-EPS beat and a revenue miss, are from the Associated Press earnings snapshot (via WTOP), which cites Zacks. Separately from those outlet figures, the guidance verdict is judged only against lululemon’s own previously issued guidance (Exhibit 99.1 to the Form 8-K filed 2026-06-04, accession 0001397187-26-000077, which also carries the prior full-year outlook) and against the year-ago quarter. This piece makes no claim about the share-price reaction.

Our arithmetic, labelled as such: the −4.3% revenue change, −1.0% gross-profit change, −13.4% operating-income change, −11.2% net-income change and −5.8% EPS change; the underlying gross margin of about 55.0% and operating margin of about 13.2% after removing the $134.5 million refund, and the underlying EPS of $2.06 after removing the $0.86; the observation that these fell about 360, 750 basis points and a third respectively against the prior year; the 400-basis-point rise in SG&A as a percent of revenue and the 5.7% growth in SG&A dollars; the 5.6% reduction in the diluted share count and its cushioning of EPS; and the note that Q3’s guided −10% to −11% decline is steeper than Q2’s −4%. These are approximations built on the disclosed figures, not reported numbers. The interpretation — that the reported margin expansion is a one-time item, that international’s growth is store-driven while its same-store base shrinks, and that the guidance points to an accelerating rather than stabilising decline — is our analysis, not a company statement, and is not a forecast.

Related: Hims & Hers Q2 2026 and Duolingo Q2 2026, two consumer brands where the debate is growth durability rather than profitability, and Uber Q2 2026 for a consumer platform whose reported profit likewise turns on which line you read.

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